Has The Time Come To Replace
Lowest Logical?
Follow the logic, if you can. You’re the only vendor who sells apples in Singapore and people will pay $3 per apple. However, in the United States,there are ten vendors who sell apples and due to the law of supply and demand, your price is much lower. ACME Corp says that the only way you’re going to get them to buy apples from you is if, at every farmer’s market in the United States, you are the lowest price. AND you also need to sell your apples to their Singapore office at $0.80 – even though you are the only game in town and people are lining up to pay $3 per apple. Doesn’t make much sense yet for the apple supplier, does it? Now throw in a few other factors:
A Travel Industry White Paper By Tom Ruesink, Ruesink Consulting Group, Inc. Published courtesy of Cornerstone Information Systems
“An apple a day.”
fair share of apple purchasing. The apple purchaser from ACME Corp crosses her heart and promises to do better at the apple purchasing review meeting but once the meeting ends she wipes sweat from her brow that she’s successfully avoided having her apple prices raised for non-performance.
In certain markets it is doubtful that people will buy your apples anyway. Take the Dallas market; people prefer to buy the apples from the American Apple Company (AAC). AAC’s apples are grown right there in Dallas and their customers get to go to the head of the line at the farmer’s market and are treated as if they are Mark Cuban or Matthew McConaughey. ACME Corp “recommends” your apples to their employees, but still allows them to purchase from other food stands. There might be a little note in the employee handbook suggesting that they buy your apples, but that’s about as far as it goes. It’s right next to the note that says “don’t use Facebook on company time.” In order to maximize the revenue from the purchase of apples, a few years ago you and your Apple company brethren instituted the “Fair Apple Share” model. Apple discounts are based on which bushel in a Topeka warehouse the apples are grabbed from. You insist that ACME Corp. sends all their purchase receipts to Gandalf the White Oz. Then, from somewhere behind the curtain, Gandalf the Oz produces some row/column reports that tell you that ACME Corp. did not meet their
Understatement #1
Everything I thought I learned in Macroeconomics 101 was wrong and my C grade should’ve been an A. Put more succinctly, there has got to be a better way to formulate and strengthen a partnership between supplier and vendor than what exists today.
Understatement #2 Both the company and the supplier share blame in creating and perpetuating the existing system.
People get paid a lot of money for restating obvious issues and then pontificating about a better way forward. We call these people consultants (among other names). In order to pay homage to my profession, there will be a bit of pontificating, but I’d at least like to offer up some thoughts on doing some things that might upset the apple cart a bit, but hopefully move the partnership
“How you like them apples?”
(credit to G.W. Hunting)
“Why not upset the apple cart? If you don’t the apples will rot anyway.” - Frank Clark
dialog up a notch. In order to do that, I think it is important to dive a bit deeper into where each party has culpability and then offer up some suggestions on that better way forward.
Suppliers – Here are some things to chew on:
1
Have you made the measurement system too complex?
Let’s face it – there is no place where the company can easily check its progress toward their goals. More specifically, is QSI easy to manage? Hardly. It forces clients to use third-parties, varies by month and schedule, and has been responsible for more Tylenol consumption than the label function in Excel. Yes, the revenue management and discounting can be complex, but when it comes to measurement, most airline folks that I talk to will freely admit that the success of the contract comes down to a few key markets. How about a system that measures those key markets and tracks progress weekly and presents the information in a visually compelling way? The other stuff can still be reported on, but let’s make contract management digestible.
2
Are you focusing on only the end result or steps to get there?
Now hold on here, Tom. As long as ACME Corp delivers share, why should we be in hassling them about the
Top 25 Key Domestic Markets What is the ratio of business What percent of business is Supplier X receiving
steps they take? I’ll start with two words, “advance purchase”. Using the same logic of “end result is all that matters”, why should a corporation measure anything but average segment price? However, internally, the companies know that something like advance purchase or self-booking are the behaviors necessary to drive that lower price – so they use tools like Cornerstone’s C3 to scorecard things like advance purchase, self-booking, use of lowest logical, etc. So, if that’s the case, then what should suppliers measure? I would love to see the carriers start rating the corporation’s use of biasing. If ACME Corp only displays the suppliers fares in a certain market, that would be worth a 5 rating and X% discount. If they require their travelers to enter a reason code if they don’t take the supplier fare, that may be a 4 and a “book here” icon next to the supplier’s name is worth a 3, etc.
3
Have you clearly told the story of organic share versus intentional share?
Yes, you’ve separated out your markets into Group A (competitive), Group B (somewhat competitive), and Group C. Yes, you’ve adjusted your discounts accordingly based on hub origin.
But couldn’t we boil some of this down to 25 or 50 key domestic and 25 or 50 key international markets and then measure cumulative share based on departure from hub city and non- hub city? As a carrier, I expect that my schedule and loyalty programs help drive hub business. In the table, 60% of
Departing from Hub City (Organic) 60%
Departing from Non Hub City (Intentional) 40%
90%
20%
In this example, the corporation has a relatively equal mix (60/40) of departure from the carrier’s hub in key competitive routes. However, when we break out that 60% and 40%, they are supporting the hub carrier 90% of the time exit hub city (likely due to loyalty programs) and only 20% of the time when departing from non-hub cities. This corporation obviously struggles to shift share intentionally toward a preferred carrier and it would not make much sense for the carrier to give them strong discounts.
ACME Corp business comes from my hub cities (organic) and 40% comes from non-hub cities (intentional). Now here is the number I want, what percent of the 60% comes to me? For the purpose of this illustration let’s claim 90%. This is the organic business. The second number I want to see is what percent of the non hub business do I get? Let’s say 20%. This is intentional. That split of 90% when it is my hub (organic) compared to 20% from my competitor’s hub (intentional) tells me volumes about the ability of ACME Corp to truly shift share.
4
Why aren’t suppliers putting forward inventory assumptions and measuring to those?
Do I hear a collective “amen” from the corporate travel managers reading this? Often discounts now are based on inventory booked. That aggressive discount in D class or I class sure looks good on the contract and you told us we’d see it 80% of the time when purchasing 14 days out. Now, how often did we really see it? I can’t tell you how many times I have heard the phrase “bait and switch”. How can the carriers be more transparent about their end of the bargain and list the inventory class assumptions and the actual performance to those assumptions? It’s a small but important step toward a better and more transparent partnership.
5
Why haven’t we seen “rational partner airfare” as a boilerplate offering from the booking tools?
If we got an “amen” from corporate travel managers on item #4, here is where we get a “hallelujah” from the airline corporate sales executives.
Primary reason we haven’t seen “rational partner airfare”: Noise. Mister or Ms. Airline Supplier, I know that hearing “lowest logical airfare” from a corporation is akin to nails on a chalkboard. Why shouldn’t you expect your
Rational Partner Airfare: A Travel Industry White Paper By Tom Ruesink, Ruesink Consulting Group, Inc.
client to take a $280 fare over a $220 competitor fare when you’re offering up a $3000 fare to Singapore instead of $5000 because of your awesome discount? The “All or Nothing” approach isn’t palatable because of the noise it creates. Corporate travel managers should not be forced to offer only your fare in a market without some recognition, reward and safeguard. When that happens, suddenly your planes are sold out of good inventory; all that is left is the $900 airfare. The noise happens when Sally Smith complains about her travel department offering these outrageous $900 fares when she could get the same flight on Carrier K for $300.
“Millions saw the apple fall, but Newton was the one who asked why.” Bernard Baruch
Knee jerk reaction = lowest logical airfare in every market.
So, in turn, corporations go 180 degrees the other way and tells the carriers that they need to be lowest fare in every market – hence the term lowest logical. Much to the company’s delight, the airline winces but takes the bait.
Reasonableness Test = Rational Partner Airfare
If Rational Partner Airfare were a reality, the corporation would only display partner carrier fares when either: • The fare price isn’t over $X in this market, or • The fare price you’re offering is within X percent of the average amount If these scenarios don’t exist, then you display all airlines fares. In turn, carrier discounting is much more aggressive as ACME Corp is taking the steps to truly drive business.
Why consider this?
We know that carriers are getting better and better at measuring displacement value (the value of that seat if we were to sell it to someone else) so I truly don’t see this concept as that far off. The technology certainly exists today with all the rule scripting engines available. In conjunction with this, are you helping the corporations tell the story?
Published courtesy of Cornerstone Information Systems
The only caveat here is that if such a system were in place, the carriers have to do a better job of telling that partnership story between corporation and supplier. Help the travel managers make it easy to explain up the line to their procurement stakeholders and executives. Have good slides and metrics around the amount saved from the overall partnership or alliance agreement. Help the traveler and the corporation with the narrative around the overall value of their shortterm decision in the long-term picture.
Here is where I see some real challenges for the corporation – how do they make the traveler feel like a hero for being part of a cost-savings story by taking carrier A instead of hometown carrier B? To date, that story is often only being told through some basic policy guardrails and a slap on the hand when they get home. If that’s the case, I believe corporate discounts will continue to decrease.
Corporations – Sink your teeth into this. “If you have an apple and Carriers have become experts at curating traveler loyalty. For example, carriers in 2011 are onboarding travelers into their loyalty programs, differentiating every experience of that traveler from when they board, how they go through security, how long their hold times are, when their bags come off the plane, and the list goes on. In short, the supplier has a great stickiness to your traveler and trying to ask the traveler to move away from that carrier is no easy task. Who doesn’t like getting on first and enjoying a beverage while watching others try to cram a weeks’ worth of clothes into an overhead bin the size of a shoebox in order to save $15? The ability to get contract discounts should be primarily dependent on the ability for a corporation to drive business that wouldn’t naturally be received if there were no discount in place. The stickier the relationship between carrier and traveler, the more difficult it is to change.
I have an apple and we exchange these apples, then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.” – George Bernard Shaw
Rational Partner Airfare: A Travel Industry White Paper By Tom Ruesink, Ruesink Consulting Group, Inc.
A Partnership System – Possible or Pipe Dream Suppliers want their promised contract revenue and market share. Corporations want to maintain or improve their discounts. Makes perfect sense but neither is happening. At least, not as intentionally as it should. I would put forward that it all comes back to the narrative. 1.The suppliers need to enable the narrative with their partnering corporation more clearly by: a.Simplifying the overly complex revenue models that have led to over-the-top detailed contract terms that are too hard to monitor and manage let alone action b.Measuring, reviewing and rewarding biasing strategies and intentional share shift tactics c.Becoming more transparent about fare availability and inventory assumptions d.Insisting on and enabling the rational partner airfare concept with the self-booking tools and the corporations – which would lead to more effective biasing 2.The corporations need to enable the narrative with their supplier partnership in a stronger way within their organization and make the traveler a hero for choosing the supplier by:
a.Educating executives and travelers on what it means to have a partnership with Carrier B and why it’s important to support them even when it’s slightly inconvenient or a bit more costly on an individual trip. b. Realizing that communicating the value of a corporate travel program goes way beyond the guardrails of creating a policy and sending out reports. Suppliers have vigorously courted and onboarded the travelers within a company. The time is now to have the same intensity about helping the traveler feel special and that the corporate travel program is much more than rules and reports. The question is valid, “If you can’t move travelers from carrier X to carrier Y, why should carrier Y provide any discount?” So is a partnership solution possible? I believe so and I think the time is right to make it happen. Now before the industry veterans label this as pie in the sky thinking, I’ll quote a guy who was the father of a very cool Apple.
“Everyone here has the sense that right now is one of those moments when we are influencing the future.” -Steve Jobs
About The Author Minneapolis based Tom Ruesink was a director in the consulting division for a large Travel Management Company before venturing off to start Ruesink Consulting Group in 2006. He helps Fortune 1000 companies drive T&E savings and compliance, helps travel vendors with their reporting strategies, and is a gamer-at-heart. He published his first gaming article in a 1983 All-Star Replay magazine (Avalon Hill) while in high school and in the mid 2000’s was the #2 ranked electric football player (yes, that ol’ game) in the Tom Ruesink President Ruesink Consulting Group, Inc.
United States behind a guy named Raiderman. Tom can be reached at tom@ruesinkgroup.com.
Published Courtesy Of Cornerstone Information Systems Cornerstone Information Systems is a professional services company helping travel management companies, corporate travel departments, airline and global distribution systems work more efficiently and more profitably. Founded in 1992, Cornerstone Information Systems is a privately held company based in Bloomington, Indiana with personnel in eight locations worldwide. Further information about the company is available at www.ciswired.com.